Finding Revenue Growth in the Medical Software Industry
    Your client is GenCo, a large, international, diversified company with a health care division that produces a wide variety of medical instruments and related services. Five years ago, it expanded into the health care software industry by purchasing MedCount, which markets administrative systems to large U.S. hospitals. These systems are designed primarily for back-office functions; they are not designed for managing patients or providing other physician and technical support. Since it was purchased, the software division has failed to deliver the growth needed to justify the multiple GenCo paid for it. GenCo feels it has already squeezed margins as much as possible, and now is looking for new sales opportunities. MedCount turned to BCG to help identify potential ways to increase revenues.
    
    Establish Understanding of the Case
    
    First, let me make sure I understand the problem. The parent company produces medical devices and services, but before the acquisition was not involved in health care software. The company it purchased, MedCount, sells only administrative systems software to large hospitals. It is now looking for opportunities to increase revenues.
    That is correct.
    Could I take a moment to jot down a few thoughts?
    Sure, that would be fine.
    
    
    Set Up the Framework
    
    I would suggest using the following framework:
    First, I'd want to understand the market size and growth rates for MedCount's market and related software markets.
    Next, I would like to explore the competition and their market shares.
    Third, I would like to examine customer requirements and then, given those external conditions, look at the division's capabilities to understand how well prepared it is to meet the needs of the marketplace.
    That sounds fine. So what do you want to know about the market?
    
    Evaluate the Case Using the Framework
    
    Well, the first hurdle would be to identify the markets the company would be interested in. Besides administration systems, what other types of medical software systems do large hospitals purchase?
    There are many software systems, but for the sake of time, the team focused on three primary markets: administration systems, patient administration, and physician support systems.
    What do those systems do?
    Patient administration includes systems like admissions and tracking. Physician support systems are more specialized, for individual physician procedures.
    I would like to know how large each market is and how fast each is growing. I would use secondary sources such as press releases, analyst reports, and published market studies, to obtain this information.
    Great! That is what we did during the market study. Our information revealed the following market sizes and growth rates.
    
    From a size and growth perspective, physician support systems looks like a very attractive market. I'd like to know a little about the customers themselves. The client is currently targeting large hospitals. Approximately what percentage of the market do they represent?
    We were unable to get an exact breakdown, but we know that these hospitals make up the vast majority of the total medical software market.
    That would make sense, since the more sophisticated procedures at a hospital might necessitate more advanced software solutions. I know that there have been a lot of changes in the industry as a result of managed care. I don't know much about the industry, so I would want to look at market studies and press clippings to get a better sense of the hospital market in general and any technology or software trends more specifically.
    Okay. Let's say that you did that and were presented with this summary of market trends:
    Consolidation in the industry, with three to four large hospital networks dominating 45 percent of the market
    Cost controls instituted, particularly as these large hospital networks acquire smaller hospitals (centralization of functions being a key cost issue)
    Many hospitals seeking to consolidate their vendor base
    With regard to technology, many hospitals upgrading their older systems
    If hospitals are consolidating vendors, perhaps our client has an advantage in being part of a larger medical company. Maybe the client could also gain some advantages by expanding into other software segments. Are the people responsible for purchasing software at the hospital the same for all three segments?
    Like all things, it differs by hospital, but the larger hospital networks, have tried to consolidate their purchasing not only within but also across hospitals.
    Is the decision maker for medical software the same as for medical instrumentation and devices?
    In some cases, the head of purchasing influences both decisions, but the person who makes the final choice is different. Software decisions are usually made by the hospital IT function, and those for instrumentation by the medical staff.
    I think I have a pretty good understanding of the market for now. Let's look at competition next. We could identify all the competitors and build up the market shares using a combination of public data and estimates.
    Well, let's assume that you don't have an infinite amount of time to look at all the competitors. You can only look at the top five competitors in each market. You are given the following data:
    
    Very interesting. The first thing I would note from the data is that the market concentrations are very different. In administrative systems, the top five competitors control 66 percent of the market and in patient administration, they control 65 percent. But in the physician support market, they control only 25 percent.
    I would want to know what gross margins look like in each of these markets as well. I might turn to analyst reports and look at competitors' financial statements to deduce whether they are making money in each market.
    Gross margins vary, of course, but the analyst reports have margins of 25 to 30 percent for administrative systems and for patient administration. For physician support, the margins tend to be higher, more like 45 to 50 percent.
    I see that two competitors, HTI and HCS Software Systems, have very large revenue growth in all three sectors, although they each dominate one. I would want to look at their financials, annual reports, and press releases to find out a bit more about their strategy in each of these areas.
    You'd find that they recently entered these noncore markets. Why might they have done that?
    Perhaps, like our client, each had a strong position in its own segment, HTI in patient administration and HCS Software Systems in physician support. Maybe they too decided to branch out into the other segments to find additional growth.
    That is a very good hypothesis. Let's say there is evidence in the sources you consult that supports your assertion.
    Well, if that were true, these two companies could be a threat not only in the other two segments, but also in our client's segment, administrative systems. It looks as if the client is slowly losing market share in its segment, since it is growing more slowly than its market.
    Good observation.
    The market and competitor trends could also suggest that the client may want to enter these other markets. In particular, the physician support market looks attractive, given it has high growth and lack of a dominant competitor. The higher gross margins may provide attractive returns on the necessary investment in software development.
    However, the patient administration market may also be attractive. Although it is more concentrated and offers lower margins than physician support, the client may be able to enter this segment with a smaller up-front investment. Given the trend toward upgrading existing computer systems, it may be important for MedCount to have a product offering in each of the three market segments. That should not be too difficult, since the company is already in the software industry.
    Perhaps, but you should think a little more closely about these types of software. Are all software systems alike?
    Well, let me think about that for a moment. I suspect patient administration would have relatively low entry barriers. From your earlier description, these systems appear to be pretty basic, dealing primarily with admissions and patient tracking. However, the entry barriers in physician support might be higher, since these systems are more complex and there are probably multiple systems for the various physician procedures. I guess it would be harder to get into those types of systems.
    That would make sense.
    Since the company might want to go into only some of the segments, I would want to know how important it is to have products in all three segments. Do we know if the competitors are marketing their products as a bundle?
    How might you find that out?
    Since it would be difficult to talk to a competitor directly, I would probably target a competitor's customer, particularly one that just converted from our client's software.
    Let's say you get an interview with a customer that recently switched to HTI. You discover that the competitor was offering it a better pricing deal and service for software products in all three segments.
    How were MedCount's software and service perceived in relation to those of competitors?
    The customer thought that its administrative systems were adequate, "the old standby," but not stellar.
    Were there any other key reasons it switched from MedCount's system?
    When it decided to upgrade its systems, it tried to contact MedCount, but could never get a representative to describe its options.
    Interesting. How did HTI perform?
    The HTI representative had heard that the company was considering switching software vendors and provided a sales representative to pitch HTI's administrative product the next da